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Income Tax Appellate Tribunal, DELHI ‘F’ BENCH,
Before: SHRI N.K. BILLAIYA, & SHRI K.N. CHARY
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
The above two cross appeals by the assessee and revenue are preferred against the order of the Commissioner of Income Tax [Appeals] - 28, New Delhi dated 12.03.2009 pertaining to assessment year 2006-07.
The solitary grievance of the assessee is that the CIT(A) erred in upholding the disallowance of Rs. 1.97 crores on account of Administrative and Personnel expenses determined by the Assessing Officer on notional basis, by applying provisions of section 14A of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'. r.w.r. 8D of the Rules, 1962.
The solitary grievance of the Revenue is that the CIT(A) erred in deleting the addition made on account of disallowance of interest u/s 14A of the Act to the extent of Rs. 7.30 crores.
Since the underlying facts in issues in both these appeals are common and were heard together, they are being disposed off by this common order for the sake of convenience and brevity.
The representatives of both the sides were heard at length and the case records carefully perused.
Facts on record reveal that the appellant company was mainly involved in the business of non-banking finances. During the year under consideration, the appellant company has shown income from dividends amounting to Rs. 86.88 crores and claimed it to be exempt u/s 10(34) of the Act. The assessee has suo moto allocated expenses for earning this dividend income to the tune of Rs. 55.59 crores u/s 14A of the Act. The assessee has furnished working of disallowance u/s 14A of the Act and as per the working, the assessee has allocated 55.37 crores on account of interest expenses and Rs. 21.89 lakhs on account of administrative expenses on estimated basis to earn dividend income.
The Assessing Officer was not satisfied with the working of the disallowance made by the assessee. The Assessing Officer was of the opinion that the provisions of section 14A(2) and 14A(3) of the Act squarely apply on the facts of the case. Drawing support from Rule 8D of the Rules, the Assessing Officer computed the disallowance at Rs. 62,68,08,055/-.
At the very outset, we have to state that Rule 8D of the Rules is applicable from A.Y 2008-09 as held by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd 402 ITR 640. The Hon'ble Supreme Court, in this decision, has observed as under:
“34) Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word ‘in relation to the income’ that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom.“
In the light of the aforementioned findings of the Hon'ble Supreme Court, we will now see as to how the assessee has computed the disallowance.
The summary of disallowance u/s 14A of the Act can be understood from the following:
PARTICULARS AMOUNT [Rs.] A. – Out of Interest 55,37,89,473/- B - Out of Personnel, Office & 21,89,526/- Administrative Expenses 55,59,78,999/- Total Disallowance
Disallowance of interest can be understood from the following chart:
Date Particulars DR. CR. Balance Days Interest : ’-Apr-05 Investments as on 01-04-05 9,918,759,207 9,918,759,207 0 - 11 -Apr-05 Capital as on 01-04-05 122,500,000 9,796,259,207 0 . Reserves & Surplus as on 01-04- - 3,518,837,260 11 -Apr-05 6,277,421,947 0 . 05 - ; 1 -Apr-05 /.Advance (intt. Free Fund) 152,439,000 6,124,982,947 0 - Security Deposit (intt Free fund) :1-Apr-05 1,050,000 6,123,932,947 3 4,026,696 200,000,000 ;4-Apr-05 Ranbaxy Shares 6,323,932,947 2 2,772,135 36-Apr-05 Ranbaxy Shares 360,000,000 6,683,932,947 2 2,929,943 38-Apr-05 Ranbaxy Shares 130,000,000 6,813,932,947 3 4,480,394 20,000,000 11-Apr-05 Ranbaxy Shares 6,833,932,947 1 1,497,848 60,000,000 12-Apr-05 Ranbaxy Shares 6,893,932,947 1 1,510,999 13-Apr-05 Ranbaxy Shares 60,000,000 6,953,932,947 2 3,048,299 180,000,000 15-Apr-05 Ranbaxy Shares 7,133,932,947 4 6,254,407 7;, 40,000,000 , 19-Apr-05 Ranbaxy Shares 14 22,013,164 173,932,947 03-May-05 Ranbaxy Shares 10,000,000 7,183,932,947 2 3,149,121 05-May-05 Ranbaxy Shares 10,000,000 7,193,932,947 4 6,307,010 30,000,000 09-May-05 Ranbaxy Shares 7,223,932,947 1 1,583,328 30,000,000 10-May-05 Ranbaxy Shares 7,253,932,947 1 1,589,903 150,000,000 11-May-05 Ranbaxy Shares 7,403,932,947 1 1,622,780 12-May-05 Ranbaxy Shares 65,000,000 7,468,932,947 4 6,548,106 10,000,000 16-May-05 Ranbaxy Shares 7,478,932,947 1 1,639,218 17-May-05 Ranbaxy Shares 10,000,000 7,488,932,947 1 1,641,410 5,000,000 18-May-05 Ranbaxy Shares 7,493,932,947 1 1,642,506 19-May-05 Ranbaxy Shares 5,000,000 7,498,932,947 5 8,218,009 24-May-05 Ranbaxy Shares 5,000,000 7,503,932,947 2 3,289,395 26-May-05 Ranbaxy Shares 50,000,000 7,553,932,947 1 1,655,657 60,000,000 27-May-05 Ranbaxy Shares 7,613,932,947 3 5,006,422 10,000,000 30-May-05 Ranbaxy Shares 7,623,932,947 18 30,077,982 17-Jun-05 Fortis Finvest Shares 2,500,000 7,621,432,947 17 28,397,668 04-Jul-05 Fortis Finvest Shares 2,497,500 7,618,935,447 1 1,669,904 05-Jul-05 Dividend - Ranbaxy 613,276,956 7,005,658,491 10 15,354,868 15-Jul-05 Ranbaxy Shares 1,370,627 7,004,287,864 52 79,829,692 05-Sep-05 RHCPL Shares 1,366,000 7,005,653,864 2 3,070,972 - 07-Sep-05 RHCPL Shares 51,250 7,005,705,114 0 - 60,000 07-Sep-05 RHCPL Shares 7,005,765,114 0 2,237,500 07-Sep-05 RHCPL Shares 7,008,002,614 30 46,080,017 Madhubani & Suraj Overseas 149,800 07-0ct-05 7,007,852,814 33 50,686,935 shares 66,000,000 09-Nov-05 NCRP of MHPL & SHPL Sold 6,941,852,814 0 - Eq.Shares of Forits Healthcare 127,061,400 09-Nov-05 6,814,791,414 0 - Ltd.-sold 5,747,000 09-Nov-05 Eq.Shares ofFHCHL.-sold 6,809,044,414 0 - 5,747,000 09-Nov-05 Eq.Shares of FHCHL.-sold 6,803,297,414 2 2,982,267 Shares of Mount Shivalik 335,759 11-Nov-05 6,802,961,655 3 4,473,180 Industries 255,532,385 14-Nov-05 Dividend - Ranbaxy 6,547,429,270 9 12,915,477 56,489 23-Nov-05 H.E.T.L./ U.P.Hotel Ltd. Share 6,547,372,781 0 - 60,905 23-NOV-05 JKC, JKS, PCL, MLL Shares 6,547,311,877 1 1,435,027 4,642 24-Nov-05 Perfect Circle Ltd. Shares 6,547,307,235 5 7,175,131 50,392 29-Nov-05 Perfect Circle Ltd. Shares 6,547,256,842 2 2,870,030 Reliance Inds. 1,717,342 01-Dec-05 6,545,539,500 0 - Ltd./M.S.I.L.Shares Perfect Circle Ltd./M.S.I.L. 105,882 01-Dec-05 6,545,433,618 6 8,607,694 Shares 24,188 07-Dec-05 Perfect Circle Ltd. Shares 6,545,409,430 12 17,215,323 29,671 19-Dec-05 Perfect Circle Ltd. Shares 6,545,379,759 2 2,869,208 2,500,000 21-Dec-05 OHPL Shares 6,547,879,759 5 7,175,759 980,000 26-Dec-05 OHPL Shares Sold 6,546,899,759 1 1,434,937 52,500,000 27-Dec-05 OHPL Shares 6,599,399,759 7 10,125,106 145,665 03-Jan-06 Perfect Circle Ltd.Shares Sold 6,599,254,094 66 95,463,183 17,890,000 10-Mar-06 Eq.Share of IHPL sold 6,581,364,094 10 14,424,908 75,300,000 20-Mar-06 Eq.Share of IHPL sold 6,506,064,094 0 - 30,000,000 20-Mar-06 Eq.Share of OBTPL sold 6,476,064,094 2 2,838,823 22-Mar-06 Eq.Share of OBTPL sold Balance 6.473.564.094 10 14,188,634 2,500,000 01-Apr-06 C/F 6.473.564.094 365 553,789,473
As can be seen from the above mentioned chart, the assessee has considered the investments as at the beginning of the A.Y and thereafter, deducted the interest free available funds with it and then computed the interest on day to day basis. We find that such practice has been followed by the assessee in earlier A.Ys also and the same has been accepted by the revenue authorities in the preceding A.Ys.
Though the Assessing Officer has accepted the methodology of calculation of disallowance of interest but he has considered the net worth of investment as deductible amount from the total investment. It is a settled proposition of law that if the assessee has interest free funds available with it, then, it can be safely presumed that investments have been made out of interest free funds available. We, therefore, do not find any merit in the computation of disallowance of interest made by the Assessing Officer. Firstly, the approach of adopting net worth cannot be accepted as interest free available funds available with the assessee should be given set off against the investments and then only the proportionate interest needs to be disallowed as per the computation of disallowance made by the assessee mentioned elsewhere. Secondly, as mentioned elsewhere, Rule 8D of the Rules is not applicable for the year under consideration and, therefore, no weightage can be given to the methodology given u/r 8D of the Rules for the year under consideration.
Moreover, similar methodology has been accepted by the revenue in earlier A.Ys and following the Rule of Consistency, as enunciated by the Hon'ble Supreme Court in the case of Radha Soami Satsang 193 ITR 321, the Assessing Officer ought to have followed the findings in the earlier A.Ys.
Considering the facts of the disallowance of interest, we do not find any error or infirmity in the findings of the CIT(A).
The appeal filed by the revenue is dismissed.
Now coming to the appeal of the assessee, as mentioned elsewhere, the assessee has suo moto disallowed 21.89 lakhs in respect of administrative expenses. The disallowance has been computed as under:
S.NO Particulars Amount (Rs.) 1 Personnel Expenses 6,674,251 Office & Administration Expenses 2 6,065,673 3 Depreciation 1,594,528 4 Debenture Issue Expenses 5,093,577 5 Other Financial Expenses 2,175,311 22,203,338 Expenses Suo Moto Added back in Less: the Statement of Taxable Income - Subscription 25000 44,498 -Wealth Tax - Out of Salary Leave 129,744 Encashment Gratuity 308,074 108,834 21,895,284 Disallowance @ 10% of 2,189,526 Rs.21095264/-
The Assessing Officer has computed the disallowance as per Rule 8D of the Rules, which we have already held to be not applicable for the year under consideration. All that has to be considered is whether the disallowance made by the assessee is reasonable qua the facts of the case. In our considered opinion and after considering the computation as mentioned elsewhere, the suo moto disallowance @ 10% is reasonable and cannot be faulted with. We, accordingly, set aside the findings of the CIT(A) and direct the Assessing Officer to accept the suo moto disallowance of Rs. 21,89,526/-.
In the result the appeal of the assessee is allowed.
To sum up, in the result, the appeal filed by the assessee is allowed whereas the appeal filed by the department is dismissed.
The order is pronounced in the open court on 03.04.2019.